A flight less ordinary: How Air New Zealand became Australasia's most profitable airline

Jamie Freed

The interior of the stretch version of Air New Zealand's new Boeing 787-9 Dreamliner, which made its delivery flight to Auckland on Friday. Photo: Air New Zealand

Recalling the dark days of 2001 at Air New Zealand, when the Kiwi carrier was bailed out by its government after the collapse of Ansett, Ralph Norris likes to paraphrase Winston Churchill.

“Never waste a crisis,” Norris says.

“You have the opportunity to make changes and do things in a much quicker time frame than you would in a normal-state situation.

“Qantas was a fearsome competitor and putting a lot of pressure on Air New Zealand. We had to change very, very quickly.”

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Norris, who was parachuted into the chief executive role after serving on its board, ­initially focused on the thousands of staff.

He ran a series of two-day sessions with 800 employees at a time, explaining the tough external environment meant change was needed and laying out a strategy for the future.

But first, he gave employees the ­opportunity to vent their frustration about its near collapse.

“We started those sessions off with what we called the ‘mad, sad and glad session’.

“The first few hours . . . were about people saying what made them mad about what had happened, what made them sad about what had happened and thinking about things about the airline that made them glad – what they would like to see carried into the future, the good things about the company.”

Norris says the sessions explained the challenges from new low-cost entrants such as Virgin Blue. As a result, Air NZ did away with domestic business class, standardised its narrow-body fleet to Airbus A320s, its wide-body fleet to Boeings and updated its tired long-haul service. That included ­dropping first class and introducing ­premium economy seats.

The airline decided to shut down its low-cost subsidiary Freedom Air and absorb it into the mainline division.

“We came to the view that there were issues in our mainline carrier so we had to overhaul it,” Norris says.

He says it was important to focus attention on the main business and avoid the risk of having two organisations with different fleets and head office structures, and duplicated functions, as Qantas Airways has with its budget arm Jetstar.

Pay cuts and bonuses for all

Air NZ, like Qantas, is heavily unionised. A pay freeze for lower-level employees was made more palatable by top executives ­taking a 20 per cent pay cut and middle ­management a 10 per cent pay cut.

“The great thing was that after the first two years we were able to pay a bonus to all of our staff,” Norris says.

“We actually got back into profit much sooner than we expected and the organisation’s customer satisfaction levels were increasingly significant.”

The return to profitability helped give the management team and the board, led by then chairman John Palmer, the confidence to place a large order for new long-haul aircraft. That included the 787-9, the stretch version of the Dreamliner, which made its delivery flight to Auckland on Friday. Air NZ was the first airline in the world to take delivery of the new plane.

The Kiwi carrier is now the most pro­fitable airline in Australia. It expects to report a full-year pre-tax profit of at least $NZ300 million ($282 million) in August, which compares with analysts’ forecasts for a pre-tax loss of $731 million at its once-stronger rival Qantas.

Within the airline industry, Air NZ has plenty of admirers.

Dominic Walsh, the managing director of brand consulting firm Landor Australia, has worked for Qantas and Jetstar. He says Air NZ’s focus on innovation is much more exciting for customers and employees than Qantas’s cost cutting.

“You have seen Air NZ taken a lead [on Qantas],” Walsh says.

“You get a sense Air NZ has a clear vision for the future and where future growth is going to come from. I think there is still a ­tension between Qantas and Jetstar in terms of how they happily co-exist.”

Over the past decade, Air NZ has beaten Qantas with innovations such as a business class seat that can be reclined for take-off and landing, a premium economy cabin, a Skycouch in economy that can become a lie-flat seat, kiosk-based check-in for international flights and a travel debit card linked to its frequent flyer scheme. Soon it will offer a TripAdvisor app on the in-flight ­enter­tainment system.

There are also its famous safety videos featuring celebrities such as Sports Illustrated swimsuit models, Bear Grylls, Betty White and Richard Simmons. They have helped to promote the brand worldwide.

“I think the marketing has done a fabulous job in the last four or five years,” Air NZ chief financial officer Rob McDonald says.

“It is really hard for an airline our size to cut through in markets like the US. Multiple times in a year we will get ourselves on prime time television in America, whether it is The Hobbit stuff, whether it is Sports Illustrated safety, the body painting safety videos, Betty White, all that sort of stuff.”

The Sports Illustrated models safety video has had nearly 6 million online views, which is more than the population of New Zealand.

Perhaps in part because it has Jetstar, Qantas has been focusing its marketing efforts the hardest on attracting premium passengers. In contrast, Air NZ has taken a quirkier, more egalitarian approach.

Carrie Hurihanganui, Air NZ’s general manager for customer experience, says the airline’s brand promise is about “liberating from the ordinary”, whether that means amusing wallpaper in its bathrooms or providing striped purple socks rather than plain black ones in its amenity kits.

“For us, it is about how do we create an experience that customers might tell their friends about?” she says.

Focus on product

Despite its recent financial troubles, Qantas has not lost its focus on its product. It has introduced new staff uniforms, will install fully flat business class seats in its A330s and has opened new airport lounges in Los Angeles, Hong Kong and Singapore.

“We know what is most important to our customers is that service experience and what they love about Qantas is that really authentic, genuine service we offer them,” Qantas head of creative development and customer experience Kylie Morris says.

“So we really focus on that when we design products - whether it is an aircraft seat or whether it is pyjamas, we want to have a service interaction with you.”

With its international division losing money, one investment Qantas has not been able to make are new, fuel-efficient aircraft like the 787-9s bought by Air NZ.

Qantas has options and purchase rights over 50 of the aircraft but it won’t make any decisions until its international business stops losing money.

Norris says a decision 10 years ago to buy 777s and 787-9s was a crucial milestone for the future of Air NZ’s long-haul fleet.

“We needed to make sure if we were going to remain competitive, we had to have a good product,” he says.

“But we also needed to make sure that what we were going to put in place had ­superior operating economics so that we could lower the cost of the operation. So you needed to get the 787 aircraft.”

The reporter travelled to Seattle as a guest of Air New Zealand and Boeing.